The American Retirement Association has responded to Senate Finance Committee Chairman Orrin Hatch (R-UT) expressing its strong support for tax incentives to encourage retirement savings.

“The goals of achieving a tax code that is efficient, fair, and increases the financial and retirement security of American families, are goals that the American Retirement Association shares with the Committee,” the letter states. The primary message the ARA wants to convey to the committee, the letter says, “is that the current tax incentives work well to promote good savings behavior for tens of millions of working Americans.”

But the ARA goes farther than supporting current provisions, arguing that tax incentives targeted at employers and employees should be enhanced, and that “at a minimum, any modifications to the current incentives should be evaluated based on whether or not the changes will encourage more businesses to sponsor retirement plans for their employees.”

Expanding Workplace Savings

The most important factor affecting whether workers save for retirement — and a critical factor in increasing the financial and retirement security of American families — is the presence of workplace retirement plans, the ARA notes. The letter argues that making it easier and more meaningful for a small business to adopt a workplace retirement savings plan would increase access to saving through payroll deduction and greatly enhance the likelihood that rank-and-file workers will save for their retirement.

Not only that, increasing the availability of workplace retirement plans will heighten the effectiveness of other actions to better assist lower-paid workers to save, the ARA argues. Among those is improving the Saver’s Credit. “We urge the Committee to modify the 1040 EZ individual income tax form to allow the moderate income individuals who predominantly use that form to claim the Saver’s Credit. Additionally, if the credit is directly deposited to retirement savings accounts instead of refunded to the saver, it should also help supplement savings,” the ARA suggests.

The ARA “also supports proposals that would expand retirement plan access to temporary or self-employed contract workers that make up an ever greater share of the workforce in the so-called modern ‘gig economy,’” the letter says. “The tax code should be changed to encourage retirement plan sponsors to open their plans to these workers who would otherwise not be eligible to participate in the retirement plan without jeopardizing the tax qualified status of their plan. It should also be made clear that voluntary participation in the retirement plan by contract workers should not, by itself, change the employment classification of the contract worker.”

Another factor affecting retirement savings, says the letter, is student loan debt. Calling it “one of the most challenging issues for millennial workers and their families,” the letter notes that it impedes “their ability to achieve a basic level of financial wellness” and “often precludes their participation in their workplace retirement plan, and the matching employer contributions that they would otherwise receive.” As a result, the letter says, “Those employees miss out on essentially ‘free money’ by not taking advantage of those matching employer contributions.”

The letter says that the ARA “strongly supports” a provision in Ranking Member Ron Wyden’s (D-OR) Retirement Improvements and Savings Enhancements (RISE) Act discussion draft that would allow employers to make matching contributions to their 401(k) plans on behalf of their employees who made student loan payments, but as a result were unable to afford to also contribute to their 401(k) plan. “This provision would encourage everyone to participate in the 401(k) plan and receive meaningful employer contributions to help build up a secure retirement nest egg,” the letter says.

Simplification Not Consolidation

The letter notes that some consider consolidation of provisions of the federal tax code that address retirement plans to be a goal of tax simplification. “The American Retirement Association would caution against tax reform proposals that would consolidate all the different types of defined contribution plans into a single type of plan,” the letter says. “That would not be a simplification in our view,” it continues, saying that “it would cause serious disruption since it would force state and local governments and nonprofit organizations to terminate their existing retirement savings plans and procedures and adopt a new program that would be foreign to millions of workers.”

It further argues that “The distinctions in defined contribution plans for public and non-profit workplace workers were designed to protect traditionally lower paid workers who feel called to serve society. Improved retirement security, and meaningful simplification, will be accomplished through thoughtful modifications to the existing structure” and that tax simplification should not result in “wasting resources on cosmetic overhauls that produce pain rather than savings gain.”

Pass-Through Income Tax Rates Could Eliminate Incentives for Small Business Retirement Plans

The letter applauds the committee’s work on tax reform, which it calls “long overdue.” It also cites a House Republican Blueprint proposal capping the maximum tax rate on active business income at 25% and wage income at 33%. “We expect small business owners to characterize most of their income as active business income to take advantage of the 25% tax rate and forgo contributions to a retirement plan which will be eventually taxed at 33% as deferred wages,” the letter says, noting that the ARA estimates that more than 300,000 retirement plans sponsored by small business pass-through entities affecting 24 million non-owner employees will terminate their retirement plans to take advantage of the 25% tax rate on active business income. Not only that, the letter says, deferring wages in contributions to a retirement plan which will be taxed eventually at 33% under the blueprint “results in a 10% penalty on the small business owners for saving in a retirement plan rather than paying out profits currently.” The ARA “looks forward to working with the Committee to solve this problem and continue promoting retirement plan sponsorship by small businesses.”

To ameliorate that situation, the ARA proposes modifying the HSA rules to give plan sponsors the option of offering an HSA in their 401(k) plan. “We call it the ‘HSA side car’ proposal,” says the letter, noting that in 2001, Congress passed a similar provision allowing plan sponsors to add an IRA to their 401(k) plan.

Integrating HSAs into the 401(k) would help employees in three major ways, says the letter:

Participants will get access to lower cost investment options offered in their 401(k) plan.

The proposal will give employees access to holistic financial education and planning tools so they can allocate their savings across their health and retirement accounts to best meet their family needs.

The HSA side car proposal will create more HSA accounts because opening an HSA will now be linked to retirement plan enrollment.

In addition, the letter says, the HSA side car proposal “preserves all the unique characteristics of HSAs under current law to keep things simple.”

“The American Retirement Association looks forward to working with the Committee to simplify the rules and regulations surrounding the tax incentives to save for retirement through workplace based retirement plans,” the letter concludes.